Age, Term or No Limits From the Fund Director's Point of View
Written by Gordon Greer, Director of the Strong Funds   

(Gordon Greer is also a former '40 Act Lawyer, former Counsel to the Independent Directors and former Lecturer on Mutual Fund Law and Governance Practice at Boston University)

In the March 2003 issue of the Management Practice Bulletin, Meyrick Payne makes the case for considering either mandatory retirement ages or term limits for independent investors serving on the boards of mutual funds. I certainly agree that these are matters that should be considered. He points out the advantages of those limits and some disadvantages as well. Again I have no issues with that. I should, however, like to suggest some factors in addition to the ones Meyrick lists that ought to be included in the decision-making process.

While most mutual fund groups hold only from four to six meetings of the whole board each year, meetings of large fund groups can last for two or even three days. There will probably be some additional committee meetings outside of the board meetings. Efforts to produce regional diversity on boards cause there to be significant travel time for most trustees. In addition, the volume of material that the trustees must review and absorb between meetings is very substantial. The result of all of this is that trustees, particularly the 700 who are on the boards of those fund groups which manage 80% of the total fund assets, must spend a great deal of time on their jobs. Meyrick points out, certainly correctly, that they are fairly compensated for their work.

Nevertheless, a conscious, active, senior business executive with the talents desired by a mutual fund board may well be unwilling, regardless of the compensation, to accept a position that would detract so much from his or her principal occupation. Such an executive would be more likely to accept a fund trusteeship at the retiring or retired stage of a career. It would then be necessary to consider an older retirement age than would otherwise seem appropriate to obtain the same amount of time on a board from such a person.

Most new mutual fund trustees have a long learning curve. Mutual funds do not resemble other businesses in their structure or regulatory framework. A new trustee without previous experience with mutual funds will require at least a one-year cycle of meetings to become oriented in the business, to a large degree because of the uniqueness and pervasiveness of the regulatory system. After another year or two the new trustee is likely to become sufficiently confident to begin to ask the hard questions and to take the adversarial positions necessary. This factor suggests that term limits or retirements allow for longer period of service, by several years, than might otherwise seem reasonable.

As a general proposition, we all know that really good, active, involved people with excellent judgment are hard to find. The temptation is strong to try to hold on to such persons if you can, even if doing so means breaking your own rules. But making exceptions in retirement ages or term limits tends to be contagious and the rule often then becomes the exception.

While I too have seen octogenarian trustees who did superb jobs as trustees as well as providing much needed continuity, it is generally true that our minds do not improve with age. I know if no more painful duty, as chairman of a board, dean of a faculty, managing partner, or other supervisor of very intelligent people, to have to tell someone that he or she is slipping mentally and should resign. Worse in some ways is the person who has slipped so far that the validity of a voluntary resignation is doubtful, requiring further unpleasant steps. It is unfortunate, at least in this respect, that we no longer have available the more gentle procedure of simply not nominating the problem trustee at the next annual meeting. Neither term limits nor retirement ages will solve this problem but either can lessen the chances of it occurring.

I do not wish what I have said to suggest that I am opposed to term limits or retirement ages. I only suggest that the issue may be rather more complicated than it might at first appear. I believe this issue can be decided by each board in whichever way the board decides is correct for it - but every board should at least consider the possibility of term limits or mandatory retirement at a specified age.

A final word about the process of encouraging a trustee who is not performing up to the standard his or her fellow trustees feel appropriate. My belief is that there is no more important responsibility of a board than to ask an ineffective trustee to step down. In my opinion there is no need to offer a severance package in such a case. There may possibly be times when, in connection with the merger of two boards, that severance is justified; but, then only if the remaining trustees are convinced that the restructured board will be both more effective and cost less over the long run.